September 16, 2019 BARRON’S 17
Thecompany,whichincludesCoach,hasbeenhurtbyits
ailingKateSpadebrand.AnewCEOplansaturnaround.
ByAviSalzman
TapestryBattles
ToBringItsStock
BackIntoFashion
FASHION MAVENS CAN DEBATE WHETHER THE KATE
Spade brand has gone out of style. There’s no doubt
that the stock of its parent companyTapestryhas.
Even in a rough year for retail stocks, Tapes-
try (ticker: TPR)—the holding company that owns
Coach, Kate Spade, and Stuart Weitzman—stands
out as a flop. Its shares are down 25% in 2019, to
a recent $25.50.
The past few weeks have been particularly mis-
erable. The stock lost 22% on Aug. 15 after Tapes-
try management said earnings would be flat in fis-
cal 2020, down from prior expectations of double-
digit growth. Then this month the board replaced
CEO Victor Luis with Chairman Jide Zeitlin.
Trading at just under 10 times expected earnings
for the next four quarters, Tapestry is getting a
vote of no confidence from investors.
The weakness opens an opportunity—both for
Zeitlin, who hasn’t previously led a fashion com-
pany or brand, and for investors. Shares yield
about 5.3%, and Tapestry has just $369 million in
net debt.
While it’s fair to criticize fashion choices at
Kate Spade, investors should have more confi-
dence in Tapestry’s cash flow, which has held up,
even in years when the brands weren’t resonat-
ing. Coach, which generates 71% of the com-
pany’s revenue, has been a particular standout.
Its same-store sales have risen for seven quar-
ters in a row, providing a steady source of fund-
ing for its parent’s ambitions—and a solid cash
return to shareholders. “Look at our cash flow
over time,” Zeitlin tellsBarron’s. “You can set
your watch to it.”
Tapestry’s operating cash flow has fluctuated
between $800 million and $1 billion for the past
six years. Revenue ramped up to $6 billion last
year, but earnings per share fell 2% and are ex-
pected to dip another two cents, to $2.55 a share,
in the current fiscal year, which ends next June.
Wells Fargo analyst Ike Boruchow expects the
turnaround to fully take hold the following year,
when he sees earnings per share hitting $2.90. At
a modest multiple of 10 to 11 times earnings, the
stock could reach $30, he argues.
Tapestry plans to buy back $300 million of its
shares this year, accounting for about 4% of its
stock market value. That plus the dividend means
“you are getting paid today very attractively to
basically have an option on us delivering results
on Kate Spade and Stuart Weitzman at the same
time as we relentlessly continue to look at ways
to increase the growth trajectory at the Coach
brand,” Zeitlin adds. “When—not if—we get that
right, you end up in a situation where you won’t
just get the pop from greater earnings, but I sus-
pect you will also see a multiple rerating. So you
get the double whammy on the upside.”
Zeitlin has an unusual background for a fash-
ion executive, having previously been a partner at
Goldman Sachs, where he was Coach’s banker for
years. He joined its board in 2006 and has been
chairman since 2014. Zeitlin has a feel for investor
sentiment; he’s also on the board of asset man-
ager Affiliated Managers Group.
His appointment comes at a fraught time for
the company.
Coach thrived mostly on its own for 76 years be-
fore deciding to operate more like a holding com-
pany. It changed its name in 2017 following the ac-
quisitions of shoemaker Stuart Weitzman and
women’s fashion company Kate Spade.
The three brands have some overlap. The Coach
brand sells aspirational luxury goods—well-con-
structed handbags and other accessories that pop
with color. Kate Spade falls price-wise into a similar
“treat yourself” category, though it is directed at
younger shoppers looking for more inventive styles.
OutofStyle
Retailstockshavelaggedbehindthebroadermarket,thoughsomebrandshavestruggledmorethanothers.
Recent Market YTD Forward Dividend
Company/Ticker Price Value(bil) Performance P/E YieldTapestry/TPR $25.48 $7.3 -25.0% 9.8 5.3%
CapriHoldings/CPRI 32.62 4.9 -14.0 6.4 N/A
PVH/PVH 91.87 6.7 -1.2 9.4 0.
VeraBradley/VRA 10.02 0.4 17.0 10.1 N/A
RalphLauren/RL 103.30 7.8 -0.2 12.8 2.
N/A=NotApplicable Source:FactSet“When–notif–
weget[aturn-
around]right,
youwon’tjust
getthepop
fromgreater
earnings,butI
suspectyouwill
alsoseeamulti-
plererating.So
yougetthedou-
blewhammyon
theupside.”
CEOJideZeitlin
Illustration by Lynne Carty
Tapestry
Daily close on Sept. 13
(TPR / NYSE)
Source: FactSetJan. ’19 July
10
20
30
40
50
$